INV 1: Liquidation: IRDA and Companies Act

Liquidation

• Liquidation involves winding up a company and selling its assets to pay its debts, ensuring fair distribution among creditors and members.
• This process concludes with the termination of the company's existence.

Legislative Framework

• The Insolvency, Restructuring and Dissolution Act (IRDA), sometimes called ERDA, is the primary legislative framework.
• Select provisions of the Companies Act may also apply, depending on when liquidation proceedings commenced.

Types of Winding Up

• Compulsory Liquidation: Initiated by a court order.
• Voluntary Liquidation: Initiated by the company, without court application.
  • Members' Voluntary Liquidation: Essentially a solvent liquidation, with the company expecting to pay its debts within 12 months.
    • Example: A tech startup with substantial assets decides to liquidate due to a change in market conditions but can comfortably cover all debts.
• Creditors' Voluntary Liquidation: Essentially an insolvent liquidation, where the company cannot pay its debts.
  • Example: A construction firm facing massive project delays and cost overruns initiates liquidation as it can no longer meet its obligations.
• Both commence via the company. Creditors in a creditors' voluntary liquidation have the right to choose the liquidator.
• Voluntary liquidations are addressed in Division 3 Part 8 of the IRDA and Division 3 or Part 10 of the Companies Act.

Focus Areas

• Key areas include compulsory liquidation and a creditor's right to initiate liquidation.
• Also important are the steps required for winding up and the issues arising in liquidation administration.

Court's Jurisdiction

• A company can be wound up under court order, whether already in voluntary liquidation or not, following an application by a person under section 124 of the IRDA (section 253(1)(b) of the Companies Act).
• Example: Even if a company is undergoing voluntary liquidation, a creditor can apply to the court for a compulsory winding-up order if they believe their interests are not being adequately protected.

Prospective or Contingent Creditor

• Creditors encompass prospective or contingent creditors.
• These are persons toward whom the company may become subject to a present liability to pay money in the future.
  • Example: If a company is involved in a lawsuit and may be required to pay damages, the plaintiff is considered a contingent creditor.
• Re People’s Parkway Development Pte Ltd provides additional context.

Procedure for Winding Up Application

• Applications are initiated via Originating Summons, supported by Affidavit, and served to relevant parties.
• Advertisement in an English-language local newspaper (or as directed by the court) and the Government Gazette is required.
• A deposit of $10,400 (or as prescribed) must be paid to the official receiver.
• A potential attendee serves a notice of intention to appear and provide a list of those intending to appear at the hearing.
• Details found in the Insolvency, Restructuring and Dissolution (Corporate Insolvency and Restructuring) Rules 2020.
• Scenario: A supplier owed a significant amount by a struggling company initiates a winding-up application. They ensure all required documents are filed and advertised correctly, adhering to the procedural requirements.

Grounds for Winding Up

• The most common ground is the company's inability to pay its debts, as indicated in Section 125(1)(e) of the IRDA and section 254(1)(e) of the Companies Act.

Establishing Inability to Pay Debts

• Statutory Demand: Failure to meet a statutory demand (s 125(2)(a) IRDA; s 254(2)(a) CA).
  • Example: A bank issues a statutory demand for an overdue loan. The company fails to respond within the stipulated timeframe.
• Unsatisfied Execution: Execution on a court judgement by a creditor is returned unsatisfied (s 125(2)(b) IRDA; s 254(2)(b) CA).
  • Example: A creditor obtains a court order for payment but is unable to recover the funds because the company has no assets.
• Proof to the Court: Proving to the Court the company cannot pay its debts (s 125(2)(c) IRDA; s 254(2)(c) CA).
  • Example: The company's financial statements clearly show liabilities far exceeding assets and ongoing losses.

Statutory Demand Details

• Conditions include a debt exceeding S$15,000.
• The company must neglect to pay, secure, or compound the debt to the creditor's satisfaction within three weeks of the demand.
• The demand must state the company's option to secure or compound the debt.
• Challenges may arise based on irregularity if these conditions are not met, as seen in BNP Paribas v Jurong Shipyard.
  • Example: A statutory demand that does not explicitly state the company's right to secure or compound the debt may be deemed irregular and invalidate a winding-up application.

Disputing Debt

• An undisputed debt generally results in the Court ordering the company to wind up.
• Illustrated in Metalform Asia Private Limited v Holland Leedon Private Limited, a bona fide cross-claim may be disputed on substantive grounds.
• The company can seek to stay or dismiss the application or file an injunction to prevent it.
  • Standard of proof in relation bona fide dispute is no more than for resisting a summary judgement application.
  • Example: A construction company facing a winding-up petition argues it has a valid claim against the petitioning creditor for defective materials, preventing the winding-up order.

Cash Flow Insolvency Test

• The test evaluates if a company's current assets exceed its current liabilities, enabling it to meet debts within 12 months, as explained in Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd.
  • Example: A retail chain's current liabilities include supplier invoices, employee salaries, and rental dues all falling due within the next 12 months. The cash flow test will assess whether the company's cash on hand and expected sales revenue are sufficient to cover these obligations.

Court's Discretion to Wind Up

• Even where a company cannot pay its debts, the Court retains the discretion not to wind it up.
• As seen in BNP Paribas v Jurong Shipyard Pte Ltd, the Court will consider public interest, such as the impact on employees.
  • Example: A major employer in a small town faces a winding-up petition. The court may consider the widespread job losses if closure occurs. They may choose to adjourn the hearing of a winding - up application conditionally or unconditionally to allow the company to settle the debt.

Effect of Winding Up Application

• A company, creditor, or contributory can apply to stay further proceedings via Section 129 of the IRDA and Section 258 of the Companies Act.
• Prior to the hearing, a company or creditor can apply to stay further proceedings against a company.
• A winding-up order is not automatic.

Effect of Winding Up Order

• No action can proceed against the company without the Court's leave (s 133 of the IRDA).
• Creditors cannot benefit from uncompleted execution (s 206 of the IRDA, s 334 of Companies Act).
• Creditors cannot retain the benefit of uncompleted execution.
  • Example: A creditor has commenced garnishing proceedings against a company to garnish the funds in a company's bank account, if the garnishing order has not been made absolute , the creditor will not be able to take the benefit of the proceeds of execution

Winding Up Administration

• A winding-up order renders the company's board of directors functus officio (no longer holding any power or authority).
• The power to run the company transfers to the Official Receiver, or a private liquidator.

Liquidator/Official Receiver

• The liquidator is appointed by the Court and is an officer of the Court.
• They must be independent, act fairly, and owe fiduciary duties to the company and its creditors.
• The liquidator is entitled to remuneration.
• A duty exists to liquidate company assets and use the returns to settle the company’s debts and liabilities.
• Example: A liquidator identifies several undervalued properties owned by the company. They take steps to sell these properties at market value, maximizing the returns for creditors.
• A liquidator will rely on the statement of affairs and Section 141 of the IRDA and Section 270 of the Companies Act.
• The method of distribution is Pari Passu.

Statement of Affairs

• The Statement sets out a company’s assets, liabilities, and details of its affairs.
• A liquidator may apply to the Court for a person to be examined, with knowledge of the company’s affairs, as per Section 244 of the IRDA and Section 285 of the Companies Act.
• Example: A liquidator suspects that the company's former CFO has concealed funds in an offshore account. They apply to the court to have the CFO examined under oath.

Pari Passu Distribution Principle

• This principle means treating like creditors alike, but not necessarily equally.
• Creditors are entitled to a pari passu distribution of the company's assets based on their rank.
• Section 203 of the IRDA (Section 328 Companies Act) outlines preferential creditors and order of priority.
  • Example: Employees' unpaid salaries rank higher than unsecured loans from suppliers.
• Contracts that attempt to opt out of the pari passu principle are invalid.
• Attempts to do so are struck down, as shown in Joo Yee Construction Pte Ltd (in liquidation) v Diethelm Industries Pte Ltd.
• Contracts directing a company's debtor to pay unsecured creditors upon liquidation contravene this principle.
• Example: A company contract instructs its main customer to pay directly to its unsecured creditors. This is to secure and give them leverage in the instance of it winding up, going against the Pari Passu Principle.

Proving Debts

• Proofs of Debt is covered under Division 2, Part 9 of the IRDA.
• Section 218 of the IRDA covers provable debts.
• Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise, breach of trust, tort or bailment, or an obligation to make restitution, are not provable. Apart from such demands, all debts and liabilities, may be proved in the winding up, unless such liability is not capable of being fairly estimated
  • Example: A company that breaches a terms of use will not be able to claim for any loss of earnings or damages.
• Preferential Claims are defined in Section 203 of the IRDA (Section 328 of the Companies Act).
• If insufficient assets are available, distribution occurs in equal proportions.
• Any residue is distributed among members as per the company's Memorandum and Articles of Association.
• A liquidator must assess each debt proof and ask for further evidence as needed.
• Scenario: A creditor submits a proof of debt without supporting invoices or contracts. The liquidator requests these documents before accepting the claim.
• While audited accounts may inform a liquidator, a liquidator needs to show there is some basis to query a debt that appears genuine on its face.
• Fustar Chemicals Limited (Hong Kong) v Liquidator of Fustar Chemicals Private Limited provides further details.
  • Example: A company that shows the reasonableness of the absence of primary documents will be assessed.

Principles governing insolvency set-off

• Set-off is mandatory where the principle of mutuality is present and "there have been mutual dealings".
• Accounts are taken from the date of winding up. Section 219 read with 218 of the IRDA.
• Regarding account, the court may consider events after the commencement of the winding up for valuation purposes.
• For foreign currency claims, see Re Lehman Brothers Finance Asia Private Limited – the date should be the winding-up order, not the application.
• There must be debt owed to both the claimant and another, not be satisfied with either claim alone and each claimant must be personally liable for the debt owed to the other. For mutuality to exist, two conditions must be satisfied: each claimant must be personally liable for the debt owed to the other, and the claimant must beneficially benefit from the debt owed to him. This must exist or clearly ascertainable without having to inquire.

Estate Costs Rule

• Liquidators can commence proceedings on behalf of the company.
• A liquidator making payments to himself or any third party in breach of this rule will be held personally liable for any shortfall in the company's assets. - Ho Wing On Christopher v ECRC Land Private Limited.
• A liquidator should be conscious of “estate costs," i.e., adverse costs orders made against the company rank in priority over the liquidation expenses and claims of unsecured creditors.
  • Scenario: The liquidator of an insolvent company initiates a lawsuit against a former director for breach of fiduciary duty. The company loses the case and is ordered to pay costs to the director. These costs will take priority over the liquidator's fees and unsecured creditors' claims.

Dissolution and Release

• A liquidator can apply for dissolution and release.
• The Court may declare the dissolution void within two years if it has fully dealt with all claims, and an application by any interested persons has been raised.
• Example: The court has the power to declare the dissolution void at any time within two years after the date of dissolution.